Question

Assume that fast-food restaurants generally provide an ROI of 15%, but that such a restaurant near a college campus has an ROI of 19% because its relatively large volume of business generates an above-average turnover (sales/assets). The replacement value of the restaurant’s plant and equipment is $198,000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 15% ROI.
Required:
a. What is the maximum price you would be willing to pay for the business?
b. If you purchased the restaurant near the campus for $750,000 and the fair value of the assets you acquired was $600,000, identify the account along with its balance, that is used to record the additional amount paid over the fair value of the assets.

Answer 1

Answer:

A. $250,800

B. $150,000

Explanation:

a. Calculation for maximum price

First step is to find the Earnings per year amount using this formula

Earnings per year= ROI×Plant and equipment replacement value

Let plug in the formula

Earnings per year=198,000*19%

Earnings per year=37,620

Second step is to calculate for the maximum price using this formula

Maximum price=Earnings per year/ROI

Let plug in the formula

Maximum price=37,620/15%

Maximum price= 250,800

Therefore maximum price is $250,800

b. Based on the information given each of the asset that each individual acquired will be recorded at the market fair value amount while the amount of $150,000 will be recorded as Goodwill.

Using this formula to calculate Goodwill amount

Goodwill =Purchased amount- Fair value

Let plug in the formula

Goodwill=750,000-600,000

Goodwill=$150,000